Wednesday, 20 July 2022

Moody's Raises Long-Term Credit Rating of City of Zagreb and Zagreb Holding

ZAGREB, 20 July 2022 - The international credit rating agency Moody's has raised the long-term credit rating of the City of Zagreb and the Zagreb Holding multi-utility conglomerate by two notches, from Ba1 to Baa2, that is from a speculative to an investment grade, with a stable outlook, the City of Zagreb said on Wednesday.

"We are glad that Moody's has recognised the financial stabilisation not only in the City of Zagreb but also the restructuring of Zagreb Holding, which was necessary for the City of Zagreb and Zagreb Holding to withstand new challenges caused by global circumstances," Zagreb Mayor Tomislav Tomašević said, commenting on the upgrade of the rating.

After the decision to raise Croatia's credit rating, the agency expects the upgrade of the rating will positively affect the City of Zagreb and Zagreb Holding following the introduction of the euro, having in mind the strategic position of Zagreb within Croatia. A stable outlook related to the credit rating of the City reflects its financial stabilisation and a medium-term reduction in debt burden, the City said.

Moody's says that Zagreb's Baa2 rating reflects its large and diverse local economy, which contributes to a tax revenue base with low volatility and a positive growth trend. It also noted that the debt of some of the City-owned companies would continue to decline in the medium term thanks to better financial results.

The agency stated that Zagreb's solid institutions and its governance strength are reflected in a governance issuer profile score that is neutral to low. The City's high credibility contributes to this, as it manages its operations using prudent financial planning, which allows for multi-year forecasting of key trends, the press release reads.

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Wednesday, 11 May 2022

Financial System's Exposure to Systemic Risks Increased, Says Central Bank

ZAGREB, 11 May 2022 - The Croatian National Bank (HNB) Council on Wednesday said the domestic financial system's exposure to systemic risks has increased due to the war in Ukraine and sanctions against Russia, and that inflation will increase the cost of new loans and burden loan repayments with variable interest.

The HNB Council discussed current economic and financial trends, underscoring that statistical indicators show that economic growth strengthened at the start of the year but that weaker consumer confidence is evident which, despite a mild recovery, retained a relatively low level in April.

Increased employment stopped in March, even though nominal wages are growing increasingly fast, while inflation has accelerated as the increased prices of oil and raw food on global markets, partially affected by the war in Ukraine, are spilling over onto domestic prices of petroleum products and food, HNB said.

Due to expected changes in the monetary policies of central banks in major economic areas, short-term and long-term costs of state financing have increased, with interest rates on corporate loans increasing slightly too, the HNB Council said. In those circumstances, lending to non-financial companies has accelerated, while household loans continue to increase at stable rates, reflecting strong housing loans.

The financial system's overall exposure to systemic risks has increased due to the war in Ukraine and sanctions against Russia, with the consequences prices of raw materials and other goods on global and regional markets. The uncertainties with regard to the pandemic and recent geopolitical tensions have not yet jeopardised the stability of Croatia's finance sector, HNB said.

The challenges in the coming period are related to geopolitical instabilities and inflationary pressures, the effects of expected normalisation of the monetary policy and the continued increase in real estate prices, HNB said.

Gradual price increase on new loans and burden on repayment of loans with a variable interest rate

The duration of the war in Ukraine will determine the degree of impact on macroeconomic, fiscal and financial trends.

HNB notes that disruptions in supply chains which additionally impact price rises could be a great burden on companies and households. In circumstances of growing inflation, it is expected that monetary policies will sharpen and key interest rates will increase in the largest economic areas. That will gradually increase the cost of new loans and burden loan repayments with a variable interest rate, HNB noted.

The negative impact of increased interest rates is buffered by a tendency of a decreased debt by households and companies and a relatively low level of debt by households and a relatively small number of loans whose repayments could increase significantly. The introduction of the euro as the official tender will additionally impact price increases and the government's debt.

Harsher financing conditions on international financial markets and then an increase in domestic interest rates could buffer some risks for financial stability that strengthened over the long period of low interest rates, such as the strong borrowing by the private sector, low bank profitability and search for risky investment alternatives that offer a higher return rate. That risk is also related to a strong price increases in real estate, which is supported by a large volume of housing loans, HNB said.

HNB underscored that it is monitoring and analysing the development of the financial system's vulnerability so that it can introduce measures in its remit. It recalled that at the start of 2022 it had announced raising the rate of anti-cyclic protected capital which would additionally strengthen the resilience of credit institutions from possible losses related to exposure to cyclic systemic risks in a downward phase of a financial cycle or the emergence of an unexpected crisis.

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Sunday, 3 April 2022

HNB and HUB: No Risks to Stability of Financial System Observed

ZAGREB, 3 April (Hina) - No risks to the stability of the financial system have been observed so far, given the high capitalisation of the banking system and relatively low household indebtedness, the Croatian National Bank (HNB) and the Croatian Banking Association (HUB) say.

The HNB has raised the countercyclical capital buffer (CCyB) rate from 0 to 0.5% due to the continued accumulation of cyclical systemic risks amid economic recovery following the crisis caused by the pandemic, the growth in the prices of residential real estate and the pickup in lending activity. The new rate is to be applied as of 31 March 2023.

This is the first time the central bank has increased the CCyB rate.

The aim of this instrument is to counter procyclicality in bank lending and mitigate risks to the stability of the financial system. Since its introduction in 2015, the CCyB rate for all credit institutions in Croatia stood at 0%.

The central bank said that the Croatian economy was currently in an upward phase of the financial cycle, when exposure to cyclical systemic risks grows. Such risks usually become apparent only after the cycle reversal.

The HNB made the decision in response to the continued accumulation of cyclical systemic risks, in particular the rise in residential property prices. The purpose of the measure is to ensure timely allocation of additional capital in an effort to strengthen the resilience of credit institutions to possible losses associated with exposure to cyclical systemic risks in the downward phase of the financial cycle or in case of a sudden crisis.

The HNB warned that residential real estate prices had risen annually by 9% in the third quarter of 2021, growing faster than both income and rental costs. It expects the strong demand for housing loans, backed by a new round of housing subsidies, to continue this year.

It noted that the Croatian banking sector has ample capital headroom above the current regulatory capital requirements as the total capital ratio of the banking system stood at 25.6% at the end of 2021, being among the highest in the European Union.

The Croatian Banking Association (HUB) said that the banks would comply with the regulator's decisions and that as a result of the higher CCyB rate they would have an additional amount of capital which the regulator could release if necessary.

The HUB said it had not noticed any risks to the stability of the financial system given that the Croatian banking system is among the best capitalised systems in the world and total household indebtedness is still relatively low.

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